Good day everyone, welcome to the PBF Energy Second Quarter 2018 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode, the floor will be open for your questions following management's prepared remarks. To register to ask a question, please press star and one on your touchtone phone at any time. Please note, today's call may be recorded I will be standing by if you should need any assistance. It is now my pleasure to turn the floor over to Colin Murray of Investor Relations. Sir, you may begin.
Thank you, Erica. Good morning welcome to today's call. With me today are Tom Nimbley, our CEO, Matt Lucey, our President, Erik Young, our CFO, several other members of our management team. A copy of today's earnings release, including supplemental financial and operating information, including throughput guidance, is available on our website. Before getting started, I'd like to direct your attention to the Safe Harbor statement contained in today's press release. In summary, it outlines that statements contained in the press release and on this call, which express the company's or management's expectations or predictions of the future, are forward-looking statements intended to be covered by the Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we describe in our filings with the SEC.
Consistent with our prior quarters, we will discuss our quarterly results excluding a non-cash Lower of Cost or Market, or LCM, after-tax gain of approximately $116.3 million. As noted in our press release, we will be using certain non-GAAP measures while describing PBF's operating performance and financial results. For reconciliations of non-GAAP measures to the appropriate GAAP figure, please refer to the supplemental tables provided in today's press release. I'll now turn the call over to Tom Nimbley.
Thank you, Colin. Good morning everyone, thank you for joining our call today. For the second quarter, we reported adjusted EBITDA of approximately $365 million, which was in line with our expectations a good result. We ran well when the market was there, that is the key to this business. Looking ahead, we see a number of items that are lining up favorably for the refining sector in general for PBF specifically. Market fundamentals are favorable as we progress through the summer driving season. Product inventories, especially distillates, are trending down, with inventory days to cover for distillates near five-year lows despite high refinery utilization. Demand for clean products remains strong across the board, this continues to be supported by a strong export market.
On the crude side, we continue to see opportunities to source the most advantaged barrels for our system, and we've seen many differentials move favorably. WCS takeaway capacity constraints should continue to support wider differentials, which benefits many of our assets, especially the East Coast. While RINs prices were under control in the second quarter, we are still hopeful for more prominent action on RINs, particularly since the acting EPA Administrator referenced the White House RFS negotiations at a hearing this week. EPA and EIA data show ethanol blending and use remains robust, even slightly ahead of this point in time last year, despite RINs prices well below the 2017 average. These facts prove that you can control RIN costs without adversely impacting biofuel use. Looking ahead, we believe our high complexity refining system is well prepared for the upcoming marine diesel fuel standard shift with IMO 2020.
As we have said in the past, PBF has more coking capacity on a percentage of throughput basis than all but one independent refiner. That being said, PBF does have the opportunity to optimize its system even more. We have received board approval as well as all required permits from the state of Delaware for a third-party processor to build and own a new hydrogen plant that will sell incremental hydrogen to Delaware City. The new supply of hydrogen, which should come online in Q4 of 2019, will further increase Del City's clean product yield and allow the refinery to process an even harsher crude slate. Our strategy in this environment, as always, is to put our assets in a position to succeed and capitalize on strong market fundamentals.
We do this by running our assets safely and reliably and by making selective organic investments in high-return projects that incrementally improve our crude sourcing optionality and our yield of high-value products. By executing these strategies, our assets will be profitable, and our employees and shareholders will benefit. I'll now turn the call over to Matt to run through our operational highlights.
Thanks. As Tom mentioned a moment ago, the story of the second quarter was the availability of our assets. We accomplished a significant amount of turnaround work in the first quarter. This set up our system to run well during the second quarter. The market did present some challenges as cracks narrowed late in the quarter. Favorable feedstock differentials, coupled with strong operations, offset the temporary weakness in cracks and generated strong results. Total throughput for our refining system during the second quarter was approximately 867,000 barrels per day, which was in line with guidance. Chalmette continues to run reasonably well, and we continue to see significant latent potential in this asset. The tank project completed by PBF Logistics continued to deliver on expectations as we exported on average 48,000 barrels per day of clean products in the second quarter.
The restarted reformer and associated equipment is now performing as expected, and we should see full benefits going forward. We continue to uncover and evaluate other opportunities within the plant to increase our clean product yield and enhance margins. In Toledo, our first quarter turnaround, while it was completed on budget, it did extend into the first couple of weeks of April, which impacted our results for the quarter. Since then, the refinery operated well and was able to take advantage of the very favorable crack environment. The East Coast ran well in the second quarter and continues to run well. The Paulsboro Refinery set record levels of production for asphalt, averaging 20,000 barrels per day in the quarter. Our results show the advantage of having these high-complexity assets, and Delaware in particular, has been and will be a beneficiary of wider crude differentials, especially WCS. Lastly, Torrance.
It continues to perform well. Reliability is excellent, and operating expenses, which were $6.80 for the refinery, were in line with our expectations. Our high yield of clean products, coupled with favorable crude differentials, drove those strong results. For the remainder of the year, system availability should be high. Torrance, Chalmette, and Toledo do not have any planned downtime for the remainder of the year. Our turnaround activity will be focused on the East Coast in the fall. Paulsboro has scheduled work on its coker and its smaller crude unit, which is set to begin in mid-September, with work complete by mid-October. Delaware City has turnaround work scheduled for its reformer and Aromax units set for November. With that, I'll turn it over to Erik, who will go through financials.
Thank you, Matt. As a reminder, our comments on second quarter results will exclude the aforementioned non-cash LCM item. For the second quarter, PBF reported income from operations of approximately $264.3 million and adjusted fully converted net income of $160.2 million or $1.38 per share on a fully exchanged, fully diluted basis. Our EBITDA comparable to consensus estimates was approximately $365 million, which includes approximately $8 million of non-cash stock-based compensation expense. For the quarter, G&A expenses were $58.7 million, depreciation and amortization expense was $92.3 million, and interest expense was approximately $43.4 million. PBF's effective tax rate for the quarter was approximately 25%. For modeling purposes going forward, please continue to use an effective rate of 27%. Our rent expense for the second quarter totaled $39 million.
While still a burden at the current rate, we could see full-year rent expense in the $150 million-$175 million range as compared to our 2017 expense of approximately $300 million. Consolidated CapEx for the quarter was approximately $214 million, which includes $213 million for both refining and corporate CapEx and an incremental $1 million incurred by PBF Logistics. These figures exclude the $58 million paid by PBF Logistics for the Knoxville Terminal's acquisition. With respect to our balance sheet, we ended the quarter with liquidity of approximately $1.8 billion, including $478 million in cash, and our consolidated net debt to cap was 36%. Lastly, we're pleased to announce that our board has approved a quarterly dividend of $0.30 per share. Also of note, today, PBF Logistics announced its 15th consecutive quarterly distribution increase and provided additional details on its growth plans.
I encourage you to listen to that earnings call later this morning. Operator, we've completed our opening remarks, and we'd be pleased to take any questions.
Thank you. In a moment, we will open the call to questions. The company requests that all callers limit each turn to one question and one follow-up. You may rejoin the queue with additional questions. At this time, if you would like to ask a question, you may do so by pressing the star and one on your touchtone telephone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We'll go first to Roger Read from Wells Fargo. Please go ahead, sir.
Yeah, good morning.
Good morning.
I guess could we talk a little bit, you mentioned it in the preview here, the economics of crude by rail to the East Coast, particularly WCS barrels. Could you give us an idea, is there anything else? I'm thinking the extreme differentials we've seen in West Texas and maybe as that gets worse as the year rolls on, what the opportunities may be there as well.
Sure, Roger. Obviously, you know what the market is right now for WCS versus WTI, when you later on the Brent-WTI spread, you've got a pretty wide differential. That we are going to be have been moving a significant amount
Of volume somewhere between 60,000, 70,000 barrels a day, we'll continue to source that. If we can run more, we will. Most of that is going to the East Coast, but some of that's going to Chalmette and some of it's going to Torrance as well. We see that situation continuing for 18 to 24 months, perhaps longer, it's just going to be totally a function of, much as it is in the Permian, the ability to clear the barrel by some alternative means other than rail. Right now, that looks like that isn't going to happen for some period of time. As I said, we believe this puts us in a favorable position to source a difficult crude to run, but a profitable crude for us.
On the Permian side and the distressed side there, we do have some exposure to that today, as we do run some basically Permian-based crudes in Toledo. It's not a huge volume, but we'll try to see if we can source higher volumes of that. Obviously, everybody is trying to source more volumes, those pipelines are pretty full. Good story for us, though.
Yeah, definitely. I guess the follow-up question, you've now put several quarters in a row here of good OpEx performance at Torrance, which is good. With that now essentially corrected, focus here on Chalmette. Margins there have definitely been a little bit weak. Touched on some of the things here, the restart of the reformer, and kind of the commentary to do more. Can you give us an idea at Chalmette, what we should be looking for over the next, let's say, 12 to 24 months of what can help margins there? Maybe a little more detail.
Yeah. It's a great question. To be perfectly honest, when we took over Torrance, we put all of our optimization focus, I shouldn't say all, but a high percentage of our optimization focus, self-help, if you want to use the jargon, into the opportunities that we saw in Torrance, and they were manifest. We captured a lot of those things, whether they be going into new markets like Vegas or starting to produce some asphalt in Torrance. Literally, a laundry list of things that we started pursuing and pursuing in vigor, and we've captured a fair amount of that in Torrance, but there's still some to be had. In the last three months, we have shifted that optimization focus full-time into Chalmette. Candidly, there is a lot of opportunity there. As we have talked before, that was a broken marriage, that joint venture.
There was not a lot of creativity, ingenuity, money put into the plant. We have now developed a significant list of opportunities. Matt mentioned that we made 20,000 barrels a day, sold 20,000 barrels a day of asphalt at Paulsboro at good numbers. Well, we're a pretty big player in the asphalt business, which allows us to increase throughput at Chalmette. With the Gulf Coast cracks right now, that's very economic. We're clearly focusing on different crude substitutions. They had a very narrow envelope. The other area that is, Chalmette has a lower percentage of high-value products than I would like, or we would like, and we see opportunities to increase distillate yield, particularly by modifying some of the operations inside the fence line, and we're doing test programs right now to verify that upside.
Suffice it to say, we think there's fertile ground in Chalmette.
Roger, just from the reformer, to rightsize that, depending on octane values, you should see incremental EBITDA from those process units in $40 million-$70 million a year range.
Okay, great. Thank you.
Once again, if you would like to ask a question, that is the star and one on your touchtone telephone. We'll go next to Neil Mehta from Goldman Sachs. Please go ahead.
Good morning. This is Carly Davenport on for Neil. Thanks for taking the questions. My first one's just on cash flow from ops during the quarter. Was there any working capital impact on that number we should be aware of?
We had about $65 million of positive working capital hit the balance sheet.
Okay, great. Thank you. My follow-up would just be on California. We've seen some weakness in West Coast refining margins during the third quarter. Just wanted to get your thoughts on that market going forward, and then along with that, how you view the earnings power of Torrance in that context.
I think clearly, California is a market that when everything runs well, you can get into a reasonably balanced position on inventory, supply, demand. Right now, that's pretty much the case. Everything is running well, including Torrance. Those things will change. You get into the heat of the summer, you're going to wind up seeing some operations cuts just because of, frankly, temperature, humidity, cooling temperatures. Right now, I personally believe that Torrance is going to be our best refinery in the PBF system. At the end of the day, would put it up against any other refinery on the West Coast. That assumes that we continue to make progress in how we run it and get our operating results under control. From an earnings power standpoint, we are very happy we purchased that facility.
Great. Thank you.
Thank you. We will go take a follow-up from Roger Read from Wells Fargo. Please go ahead.
Wow, I didn't think I'd be on quite that quickly. The economics you have today for hydrogen at Del City, and then how should we think about that impacting you really, I guess, 2020 onwards?
Yeah. The project will come in, as I said, fourth quarter. It is a third-party lease arrangement. We'll be spending a little bit of capital to hook up the hydrogen plant to the various units inside the refinery, and then it'll be a third-party provider of the hydrogen who's actually going to build it and operate it. We'll give them a lease payment, which is attractive and gives us a fixed cost of hydrogen, which is attractive. Clearly what this will do is, Delaware is a powerful machine, lots of coking, hydrocracking, lots of hydrotreating, and insufficient hydrogen. When you have a market that is rewarding you for running harsh, higher sulfur, lower gravity crudes. That market exists today, and we expect it would exist in the absence of MARPOL. However, with MARPOL coming, it just gets exacerbated.
We'll wind up with a little bit more hydrocracker feed. We'll make a little bit more diesel, but the big play is it would allow us to actually increase the amount of heavier, higher sulfur crudes, which we expect to be obviously threatened or negatively impacted from a price standpoint in a post-MARPOL world.
Okay, thanks. I guess, one quick follow-up on that. Where today do you source hydrogen from somewhere else, or is it simply not available on the East Coast?
Actually, there's no East Coast refinery that has a third-party hydrogen plant. The way we source hydrogen, for example, in Paulsboro, we actually have a small hydrogen plant that is there that we run periodically, but most of it comes from hydrogen produced off the reformer. In Delaware City, we do have a hydrogen plant there that we own and we run in addition to the reformer hydrogen, but that in total is not sufficient for what we can really use. This will be the first third-party hydrogen plant built on the East Coast. That's more the norm, by the way, in the rest of the country.
Right. Can you frame any kind of a margin uplift, EBITDA impact from the additional availability at this point?
Roger, I would say, what we expect in 2020 with IMO, it increases, as Tom mentioned. In today's environment, you're call it $40 million and probably north of $75 million in a post-2020 world.
Last question for you. RFS RINs issues, obviously, I've been following the same things. You've mentioned the favorable comments from the new administrator. Anything else you can add to that? I would think election year, little expectation between now and November. After that, maybe something can happen.
Yeah, I do think the administration has been working to find a solution. The other side of the refiners are not an easy group to manage. The simplest way to look at it in today's market is there have been some waivers granted by the EPA. Yet lending has not declined. In fact, it's increased. The whole argument that the biofuel side needs high RIN prices has been proven to be bunk. We'll continue to work with the White House and with the EPA. There was a compromise that we think would've worked. Maybe we'll go back to that or maybe there'll be a new one. I do think there is a joint agreement that it needs to be addressed and addressed in a comprehensive fashion.
Okay, great. Thank you.
Thank you. We'll go next to Paul Sankey from Mizuho. Please go ahead.
Good morning, all.
Welcome back.
Very impressive selection of questions from Roger there. Can we just follow up, I guess, seeing as he's asked some good ones. I was wondering how you see IMO impacting you. It was a little bit more specific what you said previously. I guess what I was wondering is how soon you think this impact is going to come through, given presumably everyone's going to have to be ready for what seems to be a three-million-barrel-a-day change in the market. I don't know if that's kind of the number you guys are working with, but the question is, do you think the impacts are coming through already, or do we wait till 2019, or will it be late 2019? Thanks.
Thank you, Paul. It's great to hear your voice again.
Same for you, Tom. The dulcet tones of New Jersey.
There you go. Look, I think we've been pretty clear on this. We are well-positioned for IMO. I personally believe IMO has probably already started to show up in some manner to a limited extent. I don't think it's going to be a light switch that goes off on December 31st. I think you're going to see, you got to get the new oil to whatever port it's got to be in so that when it starts getting loaded on a ship to be compliant fuel. I think anybody in this supply chain, whether it be the shippers, the refiners, the producers, all need to be looking at IMO because it is a rather significant change and deciding what things they want to do. Directors in every boardroom should be addressing this question. Here's our view.
The 3 main barrel number you talked about, yeah, that's pretty much the consensus. You're basically going to wind up disappearing 3 million barrels a day of high sulfur bunker fuel and then replacing it with 0.5, which is effectively a sweet gas oil or diesel lookalike. It would be a big increase in distillate demand and sweet gas oil demand. That can be made, we think, without a problem by the industry, it's very creative. That will result in higher distillate margins simply because while there's a 3 million barrel increase in demand and 100 million barrel global demand position, when you do it on a distillate basis only, it's pretty significant. I personally think the bigger factor is going to be sulfur is the enemy, the sweet sour spreads and light heavy spreads will widen out.
Particularly for refiners who don't have an ability to clear that bottom stream today. Somebody who's running Basra or Arab crudes or any sour crude that does not have hydrotreating capability on a bottom stream or coking capability, has got to find a way to clear that barrel. I think there's going to be a lot of bartering going on as people look for opportunities to maybe look to people like PBF, who have coking capacity, to see whether or not that can happen. As I said, I think you cannot wait till December 31st. That'll be way too late, and I suspect we're going to start seeing momentum pull on this thing right around mid-year.
How are you going to move the excess heavy fuel oil around? Presumably, it's not like you're generating a lot of it, but you could use more.
It's a great question. Logistics is a big play here. We talk about, okay, people with hydrocrackers, and it can make a lot of distillate, they're advantaged, and that's true. Certainly, we're advantaged because we can run every barrel we produce into a coker. There is a big logistics play. One of the reasons we announced we bought the Axeon terminal, candidly, is that has 4 million barrels of tankage and 3 of it is heated tankage. We're going to look to see how we can hook up Paulsboro and Delaware City together, just as importantly, figure out how to import coker feed into our plants. To do that, you need heated barges. You need to figure out how to have hot pipes. There's some opportunities here, there's some work that has to be done there. Logistics is a big play.
Great. Then if I could just ask the final one. I've got to work out how to frame this. It's the dreaded M&A question. We know that your stock is for sale every day in the market, we know that you're always looking. Is there anything that you can add on M&A as of today? You mentioned a relatively minor acquisition that you just made. I'm particularly wondering if there's impact from, in your view, I'm sure there is, of a couple of the mergers, notably the MPC Andeavor merger on the market. Thanks.
I think there's no doubt that the MPC Andeavor merger was, I wouldn't say a game changer, but it just raised the bar significantly in terms of consolidation. We are continuing, as you say, you know the company well. If somebody wanted to come along and write a big check that rewarded our shareholders, this management would fully support that. At the same time, absent that, we have to grow the company. Candidly, I don't know if it's because of MARPOL is probably a contributing event. As opposed to three or four years ago, the bid ask on these facilities is pretty wide, we want to be very careful of not getting deal lust and buying something in advance of something like MARPOL at a big number, then MARPOL is only going to be a couple of year thing.
We don't really have anything right now, but we continue to look.
Okay.
Thank you. At this time, we have no further questions, so I'd like to turn it back over to Tom Nimbley for closing remarks.
Thank you, everybody, for attending today's call. Those of you who have attended HollyFrontier's call, we'll look forward to seeing you next time. Thank you.
We'd like to thank everybody for their participation on today's conference call. Please feel free to disconnect your line at any time.